EUR/USD DAILY QUOTATION FORECAST

Hosein Nooriaan
E714 Econometrics Final Project
THEORY
 Currency market is highly interrelated with other economic
indicators

 Factors we expect EUR/USD to be related to :

 Stock Market ( Since 2005, stock market has been Inversely correlated
with USD)
 Gold: USD is Inversely correlated with USD because gold is safer
investment
 Fixed Income : The higher bond price, The lower interest rate, the cheaper
dollar.
SAMPLES
 I have gathered 250 samples from Google
Finance for the past 250 days.
 To be more consistent, I have chosen all samples
from ETFs, i.e: Exchange Traded Fund which
intimately replicate each underlying asset.
 Since all selected ETFs are at the same price
range(80-140) ,interpreting the coefficients will
be a lot easier.
VARIABLES
 FX: EUR/USD Price : (NYSE: FXE ) : act like
100*real EUR/USD
 I: S&P Index(NYSE:SPY)
 G: Gold Price (NYSE:GLD)
 B:Bond Price(NYSE:BND)
 Dummy: Dummy Variable
DUMMY VARIABLE
 It was interesting to note that after 150 data, the
model will totally diverge.
 If I selected just 150 data, the model will not need
any dummy(Adjust R Squre = .8), but after 150
Adjusted R square will turn into 0.1
 I realized that if I add a dummy variable , It can
explain this divergence.
 I did it with multiple level dummy variable to get the
best performance.
DATA
FX(ESU/USD) I(S&P) B(BOND) G(GOLD) dummy
136.400 120.2 81.84 133.69 0

136.07 121.64 82.21 137.66 0

137.24 122.1 82.18 137.24 0

137.27 121.61 82.21 135.59 0

138.67 122.49 82.63 137.78 0

139.83 122.72 82.61 136.38 0

.... ... .... ..... .....

134.51 119.81 79.31 111.15 0.1

134.77 119.36 79.41 111.24 0.1

135.47 121.29 79.24 113.65 0.1

136.22 121.19 79.12 113.03 0.1

135.51 119.83 79.18 112.69 0.1

135.48 119.74 79.02 113.01 0.1

133.8 116.58 79.14 108.59 0.2

132.52 116.65 78.97 106.78 0.2

132.94 116.84 79.22 106.3 0.2

MODEL
Least Square Linear Model was Selected
Where :

Fx=c(1)+c(2)*i+c(3)*b+c(4)*g + c(5)*dummy
RESULT

Fx = -181 + .7i+ 2.6b+.1g+ 72dummy

RESULTS CONT....

 Dependent Variable: FX
 Method: Least Squares
 Date: 11/26/10 Time: 22:32
 Sample (adjusted): 1 249
 Included observations: 249 after adjustments
 FX=C(1)+C(2)*I+C(3)*B+C(4)*G+C(5)*DUMMY


 CoefficientStd. Error t-Statistic Prob.  



 C(1) -181.4391 19.77047 -9.177278 0.0000

 C(2) 0.7064140.041626 16.970540.0000
 C(3) 2.6697420.259479 10.288840.0000
 C(4) 0.1130960.045708 2.4743060.0140
 C(5) 72.271041.947203 37.115310.0000


 R-squared 0.887979     Mean dependent var 133.4627

 Adjusted R-squared 0.886143    S.D. dependent var 7.260219
 S.E. of regression 2.449794     Akaike info criterion 4.649761
 Sum squared resid 1464.363     Schwarz criterion 4.720392
 Log likelihood-573.8952     Hannan-Quinn criter. 4.678191
 F-statistic 483.5429     Durbin-Watson stat 0.264799
 Prob(F-statistic) 0.000000



ANALYSIS
 All Coefficients are significant at 5% confidence(All t stats are
greater than 1.96).

 All coefficient signs matches with expectation:Gold is Positively

correlated with EUR(negatively with USD),Bond is postively
correlated with EUR(negatively with USD) and Stock Index is
positively correlated with EUR( negatively with USD)

 Adjusted R square is 0.88 which shows a very good fit of samples

 F Stat is 483 which is very significant.

ONE PROBLEM
 The only problem is Low Dublin Watson Score

 DW = 0.26

 It shows that errors are positively serially

correlated
CORRECTING FOR SERIAL CORRELATION

1- Finding Correlation between E(t) and E(t-1)

2- Finding
 y*=y(t)- P*y(t-1)
 I*= I(t)- P*I(t-1)

 B*=B – P*B(t-1)
 G*=G- P*G(t-1)

(P is correlation coefficient between E(t) and E(t-1)

FINDING CORRELATION BETWEEN E(T) AND E(T-1)

r² 0.751 n 248

r 0.866 k 1

Std. Error 1.207 Dep. Var. Errors(t)

Regression confidence
output         interval  
variables coefficients std. error t (df=246) p-value 95% lower 95% upper
Intercept -0.0235 0.0766 -0.306 .7597 -0.1744 0.1275
Errors(t-1) 0.8584 0.0315 27.215 3.73E-76 0.7963 0.9205
FINDING Y* AND X*
Fx* I* B* G*

20.7405 16.806 11.9615 16.679

19.416 17.855 12.357 21.006

20.5605 18.7315 12.3015 21.9885

19.4005 17.4935 11.9745 18.477

19.8145 18.178 12.4115 21.857

19.555 18.799 12.094 20.7545

21.905 20.3025 12.665 24.1955

21.904 18.392 12.4815 18.9535

22.154 18.7295 12.5105 20.358

20.4735 17.8135 12.175 19.193

20.7355 17.85 12.5325 21.066

-- -- -- -- ----- --- --------------

DOING REGRESSION FOR Y* AND X*

 Fx*=c(1)+c(2)xi*+c(3)xb*+c(4)xg*+c(5)
dummy
RESULT

Fx* = - 10+ 1.5i*+ 0.15b*+0.45g*+ 9dummy*

RESULTS
 Dependent Variable: DFX
 Method: Least Squares
 Date: 11/27/10 Time: 10:33
 Sample: 1 250
 Included observations: 250
 DFX=C(1)+C(2)*DI+C(3)*DB+C(4)*DG+C(5)*DUMMY


 Coefficient Std. Errort-Statistic Prob.  



 C(1) -10.34372 3.953978 -2.616028 0.0094

 C(2) 1.562578 0.313233 4.988556 0.0000
 C(3) 0.159237 0.043557 3.655824 0.0003
 C(4) 0.456584 0.047454 9.621556 0.0000
 C(5) 9.274797 0.614409 15.09549 0.0000


 R-squared0.582306     Mean dependent var19.98512

 Adjusted R-squared 0.575487     S.D. dependent var 1.343578
 S.E. of regression 0.875404     Akaike info criterion2.591534
 Sum squared resid 187.7512     Schwarz criterion 2.661963
 Log likelihood -318.9417     Hannan-Quinn criter. 2.619880
 F-statistic 85.38859     Durbin-Watson stat 1.495367
 Prob(F-statistic) 0.000000



ANALYSIS
 1- All Coefficients are still significant at 5% confidence(All t stats are greater than 1.96).

 All coefficient signs still match with expectation : Gold is Positively correlated with EUR(negatively with
USD),Bond is positively correlated with EUR(negatively with USD) and Stock Index is positively correlated
with EUR( negatively with USD)

 Coefficients have substantially changed in their magnitudes.

 DW Watson Test is 1.49 which shows substantial improvement from last equation.

 Adjusted R square is 0.57 which shows that quality of fit of has reduced.

 F Stat is 85 which is still very significant.